Economic Benefits from Air Transport in the Indian Ocean Islands

Transcription

1 n Economic Benefits from Air Transport in the Indian Ocean Islands

2 Acknowledgements Oxford Economics gratefully acknowledge the help that we received from the International Air Transport Association (IATA) in preparation of this report. Through a survey conducted by IATA many organisations across the aviation industry supplied us with data that has formed an integral part of our analysis. We would like to thank all these organisations for their generosity in supplying this data, without which this report could not have been written. A note on the data reported in the report Unless otherwise stated, the numbers reported in this report relate to the calendar year Oxford Economics 2011 v1.2 2

3 Contents Facts & figures Consumer benefits for passengers and shippers Consumer benefits Estimated consumer benefits Enabling long-term economic growth Connectivity Catalytic effects tourism Mauritius Maldives Seychelles Catalytic effects trade Economic footprint The aviation sector and its economic footprint Mauritius Maldives Seychelles Tax contribution Investment and productivity Conclusion Annex: Our methods Benefits to passengers and shippers Connectivity Index Benefits to tourism Economic footprint Exchange rates Passenger and freight volumes Mauritius Maldives Seychelles

4 Facts & figures The economic benefits of aviation in the Indian Ocean Islands Air transport to and from Mauritius, Seychelles and the Maldives (hereafter referred to collectively as the Indian Ocean Islands) creates three distinct types of economic benefit. Typically, studies such as this focus on the economic footprint of the industry, measured by its contribution to GDP, jobs and tax revenues generated by the sector and its supply chain. But the economic value created by the industry is more than that. The principal benefits are created for the customer, the passenger or shipper using the air transport service. In addition, the connections created between cities and markets represent an important infrastructure asset that generates benefits, in the case of the Indian Ocean Islands, primarily through enabling the development of their tourism sectors. 1. Aviation s economic footprint Contribution to GDP in the Indian Ocean Islands The aviation sector contributes $338 million (3.1%) to GDP in the Indian Ocean Islands region. This total comprises: $196 million directly contributed through the output of the aviation sector (airlines, airports and ground services); $47 million indirectly contributed through the aviation sector s supply chain; and $96 million contributed through the spending by the employees of the aviation sector and its supply chain. Major employer The aviation sector supports 22,000 (2.9%) jobs in the Indian Ocean Islands region. This total comprises: 12,000 jobs directly supported by the aviation sector; 3,000 jobs indirectly supported through the aviation sector s supply chain; and 7,000 jobs supported through the spending by the employees of the aviation sector and its supply chain. Tourism Through the catalytic effects of tourism, the aviation sector facilitates further benefits to the economies of the Indian Ocean Islands, in the region of $2.6 billion (24.1%) of GDP and 164,000 (21.7%) jobs. This total comprises: $1.4 billion and 88,000 jobs directly supported in the tourism sector; $809 million and 48,000 jobs indirectly supported through the tourism sector s supply chain; and $431 million and 29,000 jobs supported through the spending by the employees of the tourism sector and its supply chain. Including these tourism impacts, the air transport sector supports over 27% of GDP and almost a quarter of employment in the Indian Ocean Islands region. 4

5 High productivity jobs The average air transport services employee in the Indian Ocean Islands region generates $21,682 in GVA annually, which is nearly 50% more productive than the average. Contribution to public finances The aviation sector pays nearly $29 million in tax. Taxes paid by aviation firms and employees contribute around $24 million towards this figure, with passenger departure taxes in Mauritius and value added taxes in the Seychelles contributing an additional $5 million in government revenue. It is estimated that an additional $11 million of government revenue is raised via the aviation sector s supply chain and $23 million through taxation of the activities supported by the spending of employees of both the aviation sector and its supply chain. 2. Consumer benefits for passengers and shippers From visiting family and friends to shipping high value products, 5 million passengers and 77,000 tonnes of freight travelled to, from and within the Indian Ocean Islands region. Air passengers resident in the Indian Ocean Islands region comprise approximately 1.5 million of the passenger total. For the 5 million passenger flights in total, passengers paid $2.6 billion (inclusive of tax) for air travel, with domestic residents paying around $793 million. This expenditure is likely to significantly understate the value passengers actually attach to the flights they use (see Section 1). Calculations by Oxford Economics suggest the value of the benefit to travellers from flying, in excess of their expenditure, is worth $1.6 billion a year ($489 million for Domestic residents). Air transport is crucial for the distribution of high value to weight products. Air freight may only account for 0.5% of the tonnage of global trade with the rest of the world, but in value terms it makes up around 34.6% of the total. Shippers pay airlines $271 million annually to carry 77,000 tonnes of freight to and from the Indian Ocean Islands region. The benefit to shippers, in excess of this expenditure, is estimated as $113 million. Based on the share of exports in total merchandise trade, we estimate that domestic shippers receive less than half of this benefit ($38 million). This report describes these channels in more detail. Section 1 quantifies the benefits of air travel for air passengers and air freight shippers. Section 2 examines the way in which the aviation sector acts as an enabler of long-term economic growth through connectivity, which helps to boost the catalytic effects of both tourism and trade. Section 3 analyses the economic footprint of the aviation sector - the airlines and the ground-based infrastructure - to quantify the value of its output and the jobs it supports in the Indian Ocean Islands. 5

6 1 Consumer benefits for passengers and shippers The aviation sector comprising the airlines together with the airports, air navigation and other essential grounds services that make up the air transport infrastructure - carries over 5 million passengers 1 and 77,000 tonnes of air freight to, from and within the Indian Ocean Islands region. Among the many reasons that people and businesses use air transport, people rely on it for holidays and visiting friends and family; while businesses use air transport for meeting clients and for the speedy and reliable delivery of mail and goods often over great distances. For this reason, the air transport network has been called the Real World Wide Web 2. The most important economic benefit generated by air transport is the value generated for its consumers, passengers and shippers. Passengers spent $2.6 billion (inclusive of tax) on air travel in 2009 and shippers spent $271 million on the transportation of air cargo 3. With its speed, reliability and reach there is no close alternative to air transport for many of its customers. This means that many are likely to value air services higher than what might be suggested by their expenditure on these services. But this economic value will vary from flight to flight, and from consumer to consumer, making it difficult to measure. 1.1 Consumer benefits The value of consumer benefit varies because as you fly more often, the value you attach to each additional flight will in general fall. As frequent flyers know, the more they fly, the less excited they get when they step on a plane. There comes a point when the fare exceeds the value we place on taking an additional flight, and we choose instead to spend our money on other things. For this reason the air fares that we are willing-to-pay do not reflect the value we place on air transport so much as the value we place on the last flight we have flown. Much the same applies to the market as a whole. Air fares reflect the value placed on the service by the marginal passengers - those who would forgo the flight were prices to rise - and not the value that passengers as a whole place on air transport services. For this reason, valuing the consumer benefits for air passengers and air freight shippers cannot be inferred simply from observed fares and shipping charges. In addition to the fares paid, we need an idea of how the passengers and shippers value air transport other than at the margin. Unfortunately there is no readily available data on this, and so we must rely instead on judgement, informed by economic theory, to guide us. Economics tells us that the estimated benefits hinge on the sensitivity of demand to changes in fares the price elasticity of demand. Estimates of prices elasticities are available from previous research. Economic theory also tells us that price elasticities will fall as we move away from the margin, but it offers less guidance on how much they may fall by. This matters, because lower the price elasticity the less sensitive passengers are to a change in price the higher the consumer benefit. It follows that taxation of air travel or cargo directly reduces the economic benefit of all passengers and shippers, as well as, at the margin, stopping a number of people travelling and stopping a number of shippers using air cargo services. 1 This is a count of passengers on domestic flights as well as passengers arriving and departing on international flights. Each passenger connecting to another flight at a domestic airport is counted once on their arriving flight and again on their departing flight. 2 Aviation The Real World Wide Web, by Oxford Economics. Available at 3 Passenger spending based on fares from IATA s PaxIS database plus estimates for taxes and surcharges paid. Cargo spending based on freight rates from IATA s CargoIS database. 6

7 1.2 Estimated consumer benefits Given its sensitivity to our assumption about how price elasticities vary, we have taken a very conservative assumption that probably understates the true benefits (see Annex). With this in mind, we calculate that air passengers and shippers valued the air transport services they used, from all airlines serving the Indian Ocean Islands region, at $4.2 billion and $385 million respectively. Air passengers paid $2.6 billion for air travel and shippers $271 million for air freight. This means that the consumer benefits derived on top of that measured by expenditure on travel and shipments were about $1.6 million for passengers and $113 million for shippers. The total benefits accruing to passengers using the air transport system in the Indian Ocean Islands region will include those related to residents and non-residents as well as passengers already being accounted for under the benefits associated with the economy at the other end of international routes. Applying estimates for each country indicates that approximately 31% of passengers using air transport services to, from and within the Indian Ocean Islands region were domestic residents. As for the share of freight shipped by firms based in the Indian Ocean Islands region, data is not readily available. To give a broad indication we have used instead the share of exports in total merchandise trade. This is estimated to be 33% of the total trade in goods in From this we estimate that, out of the consumer benefits generated by domestic air transport and on top of that measured by expenditure, the citizens of the Indian Ocean Islands derived $489 million in value and shippers around $38 million in value. 4 Oxford Economics Global Macroeconomic Model 7

8 2 Enabling long-term economic growth 2.1 Connectivity The air transport network has been called the Real World Wide Web 5. Chart 2.1 gives an idea of how extensive the air transport network is for the Indian Ocean Islands. In 2010 there were 24, 10 and 17 routes connecting Mauritius, Seychelles and the Maldives respectively to urban agglomerations around the world. Chart 2.1: Connectivity, 2010 Chart 2.2: Foreign direct investment and connectivity FDI stock as % GDP 250% Line of best fit 200% 150% Seychelles 100% 50% Mauritius Maldives 0% Connectivity per $billion of GDP (PPP) Source : IATA Source : IATA, Oxford Economics These linkages represent the connectivity of the Indian Ocean Islands with major cities and markets around the world. Connectivity reflects the range, frequency of service, the economic importance of destinations and the number of onward connections available through each country s aviation network. Improvements in connectivity achieved in recent decades has brought benefits to users of air transport services by: reducing time spent in transit, increasing the frequency of service, allowing for shorter waiting times and better targeting of departure and arrival times; and improving the quality of service, such as reliability, punctuality and quality of the travel experience. A number of these city-pair connections have point-to-point services, where passenger flow density is sufficient to make the economics work. However, many of the city-pair connections that make up the Indian Ocean Islands connectivity to overseas markets can only be served by airlines aggregating flows from a number of origins through a hub airport in order to generate a sufficiently dense flow of passengers. Improvements in connectivity have been accompanied by a steady fall in the cost of air transport services. The cost of air transport services, in real terms, has fallen by around 1% a year over the past 40 years, contributing to the rapid expansion in the volume of trade seen over this period 6. Air transport has also steadily become more competitive relative to other modes of transport. For example, it is estimated that its 5 Aviation The Real World Wide Web, by Oxford Economics. Available at 6 See Swan (2007), Misunderstandings about Airline Growth, Journal of Air Transport Management, 13, 3-8, and Baier and Bergstrand (2001), The growth of world trade: tariffs, transport costs and income similarity, Journal of International Economics, 53:1,

9 relative cost has been falling by around 2.5% a year since the 1990s 7. As its relative cost has fallen, air shipments have become increasingly important for international trade. Apart from the benefits to direct users of air transport services, the largest economic benefit of increased connectivity comes through its impact on the long term performance of the wider economy. For the Indian Ocean Islands, this has been most apparent through the development of their tourism sectors. Improved connectivity can also enhance an economy s performance by making it easier for firms to invest outside their home country, which is known as foreign direct investment (FDI). Improved connectivity may favour inward investment as increased passenger traffic and trade that accompanies improved connectivity can lead to a more favourable environment for foreign firms to operate in. Chart 2.2 plots the total value of FDI built up in individual countries in relation to their GDP against an index of connectivity (produced by IATA), that measures the availability of flights, weighted by the importance of each of the destinations served. The chart shows that countries with higher connectivity (measured relative to their GDP), are in general more successful at attracting foreign direct investment. This is emphasised by the upward sloping line that confirms the statistical relationship between greater connectivity and greater FDI. 2.2 Catalytic effects tourism Air transport lies at the heart of global business and tourism. Through its speed, convenience and affordability, air transport has expanded the possiblities of world travel for tourists and business travellers alike, allowing an ever greater number of people to experience diversity of geography, climate, culture and markets. Tourism, predominantly for leisure purposes, makes a significant contribution to the economies of each Indian Ocean Island, with foreign visitors spending nearly $2.3 billion in the region in Almost all of this expenditure is contributed by passengers arriving by air, with over 97% of inbound tourists arriving by this form of travel in each country Mauritius When only considering the contribution linked to the spending of foreign visitors arriving by air, Oxford Economics estimates that in 2009 the travel and tourism industry directly employed 48,000 people and supported indirectly through its supply chain a further 28,000 jobs. A further 17,000 people were supported through the household spending of those people directly and indirectly employed by the travel and tourism sector. Through the spending of those foreign visitors who travelled by air, the travel and tourism industry directly contributed MUR 26.3 billion to the Mauritian economy (GDP), MUR 15.7 billion indirectly through the output it supports down its supply chain and a further MUR 8.8 billion through the induced effects of consumer spending (a total impact representing 17.9% of Mauritian GDP). 7 See Hummels (2007), Transportation Costs and International Trade in the Second Era of Globalisation, Journal of Economic Perspectives, 21.3, Summer. 8 Based on IMF statistics 9 Includes foreign visitors arriving on both domestic and foreign carriers 9

10 Chart 2.3: Travel and tourism s contribution to GDP and Employment in Mauritius Headcount ' Source : Oxford Economics Direct Indirect Induced Jobs GDP MUR billion Maldives When only considering the contribution linked to the spending of foreign visitors arriving by air, Oxford Economics estimates that in 2009 the travel and tourism industry directly employed 31,000 people and supported indirectly through its supply chain a further 16,000 jobs. A further 10,000 people were supported through the household spending of those people directly and indirectly employed by the travel and tourism sector. Through the spending of those foreign visitors who travelled by air, the travel and tourism industry directly contributed MVR 5.0 billion to the Maldivian economy (GDP), MVR 2.6 billion indirectly through the output it supports down its supply chain and a further MVR 1.4 billion through the induced effects of consumer spending (a total impact representing 53.7% of Maldivian GDP). Chart 2.4: Travel and tourism s contribution to GDP and Employment in the Maldives Headcount '000 Direct Indirect Induced MVR billion Jobs Source : Oxford Economics GDP 0 10

11 2.2.3 Seychelles When only considering the contribution linked to the spending of foreign visitors arriving by air, Oxford Economics estimates that in 2009 the travel and tourism industry directly employed 8,200 people and supported indirectly through its supply chain a further 4,500 jobs. A further 2,000 people were supported through the household spending of those people directly and indirectly employed by the travel and tourism sector. Through the spending of those foreign visitors who travelled by air, the travel and tourism industry directly contributed SCR 2.5 billion to the Seychelles economy (GDP), SCR 1.5 billion indirectly through the output it supports down its supply chain and a further SCR 0.6 billion through the induced effects of consumer spending (a total impact representing 42.8% of GDP in the Seychelles). Chart 2.5: Travel and tourism s contribution to GDP and Employment in the Seychelles Headcount ' Source : Oxford Economics Direct Indirect Induced Jobs GDP SCR billion Catalytic effects trade Compared to other modes of transport, air freight is fast and reliable over great distances. However, these benefits come with a cost attached. Consequently, it is mostly used to deliver goods that are light, compact, perishable, time sensitive or that have a high unit value. These key characteristics of air freight are most apparent in the data on the modes of transport used in world trade. For example, data on the weight (volume) and value of goods carried by air, sea and land transport is available for global trade. While air accounts for just 0.5% of the tonnage of global trade (Chart 2.6), air freight makes up 35% of the value of global trade. 11

12 Chart 2.6: Proportion global trade transported by air Chart 2.7: Regional distribution air freight (tonnes) 40% 35% 30% 34.6% Europe, 32% Asia Pacific, 23% 25% 20% 15% 10% 5% 0% 0.5% Volume Value Middle East and Africa, 46% Source : The Colography Group 10, Oxford Economics Source : IATA, Oxford Economics As with passenger services, air freight operations make up an essential part of the global transport network. Air freight s global reach is clearly illustrated from Chart 2.7. Measured in terms of tonnage carried to and from the Indian Ocean Islands, 46% is linked to trade with the Middle East and Africa, 32% is linked with Europe and the remaining 23% is linked with the Asia Pacific region. 10 Global Cargo Market Projections for 2006, The Colography Group, Inc. (2005) 12

13 3 Economic footprint Sections 1 and 2 have looked at the benefits of air transport services for its customers, and the longer-term benefits that accrue through increasing connectivity. In this section we turn to the domestic resources that the aviation sector currently deploys to deliver its services, together with the domestic goods and services consumed by the workers who depend on the sector for their employment. We call the value added and jobs supported by this economic activity the aviation sector s economic footprint. The resources deployed by the aviation sector are measured by its Gross Value Added (GVA). GVA is calculated either as the output created by the sector less the cost of purchased inputs (net output measure), or by the sum of profits and wages (before tax) generated from the sector s economic activity (income measure). The two approaches are equivalent. Using either approach, by adding the GVA of all firms in the economy, one derives an estimate for the economy s overall output (GDP) 11. We refer to this as the sector s direct contribution to GDP. From this direct contribution, the sector s economic footprint is calculated by adding to it the output (and jobs) supported through two other channels, which we refer to as the indirect and the induced contributions. The indirect contribution measures the resources deployed by the aviation sector through using domestically produced goods and services produced by other firms i.e. the resources used through its supply chain. The GVA generated through the indirect and direct channels supports jobs both in the aviation sector and in its supply chain. The workers whose employment depends on this activity in turn spend their wages on goods and services. The induced contribution is the value of the domestic goods and services purchased by this workforce. Taken together, these three channels give the aviation sector s economic footprint in terms of GVA and jobs. The aviation sector contributes to the economy in two other ways. Through the taxes levied on GVA (recall that it is equal to the sum of profits and wages), the aviation sector supports the public finances, and the public services that depend on them. Second, through its investment and its use of advanced technology, the aviation sector generates more GVA per employee than the economy as a whole, raising the overall productivity of the economy. These issues are discussed at the end of this section. 3.1 The aviation sector and its economic footprint The sector is comprised of two distinct types of activity: - Airlines transporting people and freight. - Ground-based infrastructure that includes the airport facilities, the services provided for passengers on-site at airports, such as baggage handling, ticketing and retail and catering services, together with essential services provided off-site, such as air navigation and air regulation. The aviation sector supports GDP and the employment in The Indian Ocean Islands through four distinct channels. These channels are: - Direct the output and employment of the firms in the aviation sector. 11 It is only true to an approximation that GVA is equal to the sum of profit and wages, or that the sum of GVA across firms equals GDP. The difference in each case, however, is small enough for us to proceed as if the equalities do in fact hold. The differences are explained in the Annex to this report. 13

14 - Indirect the output and employment supported through the aviation sector s The Indian Ocean Islands based supply chain. - Induced employment and output supported by the spending of those directly or indirectly employed in the aviation sector. - Catalytic spillover benefits associated with the aviation sector. Some of these include the activity supported by the spending of foreign visitors travelling to The Indian Ocean Islands via air, and the level of trade directly enabled by the transportation of merchandise. Table 3.1: Aviation s contribution of output and jobs to the Indian Ocean Islands Source : IATA, Oxford Economics The table above reports the economic contribution of the airlines and airports for each of the four channels. Contributions are reported both in terms of GDP and employment. In the following pages we look in turn at the aviation sector in each individual country, and describe their economic contribution in more detail. Direct Indirect Induced Total % of whole economy Contribution to GDP (USD million) Airlines % Airports and Ground Services % Total % Catalytic (tourism) 1, , % Total including catalytic 1, , % Contribution to employment (000s) Airlines % Airports and Ground Services % Total % Catalytic (tourism) % Total including catalytic % Chart 3.1: The Indian Ocean Islands Jobs and Output supported by the aviation sector Headcount Direct Indirect Induced Catalytic '000 $ million The way that we build up the aviation sector s 120 economic footprint is also illustrated in Figure 164 2, The top panel shows the two activities that comprise the aviation sector: air transport 80 services and the airports and ground-based 60 infrastructure. The panel below represents their 40 supply chains with boxes that list the most important inputs purchased by each activity. 0 The third panel from the top describes the Jobs GDP induced contribution that comes through the Source : IATA, Oxford Economics spending by workers of both the aviation sector and its supply chain represented by the arrows that link this panel with the panels above. The bottom panel, entitled economic footprint, reports the total GVA, jobs and tax contribution. These totals are the sum of the numbers reported in the panels above

15 Figure 3.1: The aviation sector in the Indian Ocean Islands 12 The Aviation Sector In this study is defined as - Locally-based Airlines Domestic & International passenger & freight services Ground-based Infrastructure - All on-site activities at Airports - ANSP - Regulators Direct Contribution of the aviation sector = GVA, employment and tax generated by the aviation sector. = GVA= $0.20 Billion Employment= 12,000 Jobs Tax= $0.03 Billion The Aviation Sector s Supply Chain Purchases by the aviation sector of domestically produced goods & services from firms outside the aviation sector. Locally-based Airlines - Aviation Fuel - Catering - Repair + Maintenance - Ticketing + Distribution (e.g. Travel Agents, CRS etc.) - Freight Forwarding - Aircraft Financing - Other Finance + Business Services Ground-based Infrastructure - Finance - Construction + Facilities management - Electricity + Water supply Non-airside supply chain - Food + Drink - Business + Marketing Services - Computing Indirect Contribution of the aviation sector = GVA, employment and tax generated by the aviation sector s supply chain. = GVA= $0.05 Billion Employment= 3,000 Jobs Tax= $0.01 Billion Induced Spending Spending by employees of the aviation sector & its supply chain on domestically produced goods & services. Induced Contribution of the aviation sector = GVA, employment and tax generated by the spending of employees of the aviation sector & its supply chain. Economic Footprint Economic footprint = Sum of Direct, Indirect and Induced Contributions. = GVA= $0.10 Billion Employment= 7,000 Jobs Tax= $0.02 Billion = GVA = $0.34 Billion Employment = 22,000 jobs Tax = $0.06 Billion 12 For a definition of GVA please refer to the Annex. Totals may not sum due to rounding. 15

16 3.2 Mauritius Airlines registered in Mauritius carry 1.1 million passengers and 27,000 tonnes of freight a year to and from Mauritius. More than 10,000 scheduled international flights depart the Mauritius annually, destined for 28 airports in 16 countries. Domestically, more than 2,600 flights make over 180,000 seats available to passengers annually, destined to 2 airports. Among the many reasons that people and businesses use air transport, people rely on it for holidays and visiting friends and family; while businesses use air transport for meeting clients and for the speedy and reliable delivery of mail and goods often over great distances. The air transport network, the Real World Wide Web, offers practical, fast and reliable transport across the globe. The regions which travellers fly to and from underline its global reach (see Chart 3.2). Airlines need ground-based infrastructure to operate. This infrastructure includes the facilities at Sir Seewoosagur Ramgoolam (SSR) Airport, Mauritius only international airport, that directly serve passengers, such as baggage handling, ticketing, retail and catering outlets. Less visible are the essential services which are sometimes provided off-site, such as air navigation and air regulation. SSR International Airport handles approximately 2.4 million passengers and 37,000 tonnes of freight annually. Chart 3.2: Regional distribution of scheduled passenger trips originating in Mauritius Africa and Middle East, 32% Asia and Pacific Region, 17% North America, 0.4% Chart 3.3: Jobs and output supported by the aviation sector in Mauritius Headcount ' Direct Indirect Induced MUR billion Central and South America, 0.4% Domestic, 4% Europe, 47% 0 Jobs GDP 0 Source : IATA Source : IATA, Oxford Economics The Aviation sector in Mauritius (comprising the airlines as well as the airport and ground-based infrastructure) directly employs 8,000 people, and support through their supply chains a further 2,000 jobs. Examples of these supply-chain jobs include those in the distribution sector delivering aviation fuel; jobs in the catering sector and construction workers building or maintaining facilities at airports. A further 4,000 jobs are supported through the household spending of those employed by the sector and its supply chain. The Aviation sector directly contributes around MUR 3.5 billion to the Mauritian economy (GDP). The sector contributes indirectly another MUR 0.8 billion through the output it supports down its supply chain. A further MUR 1.7 billion comes from the spending of the employees or those firms in the sector and its supply chains. Overall, the Aviation sector contributes MUR 6.0 billion to the economy (2.1% of GDP) and supports around 13,000 jobs in Mauritius. 16

17 3.3 Maldives Airlines registered in the Maldives carry 900,000 passengers and 500 tonnes of freight a year to and from Maldives. More than 8,600 scheduled international flights depart Maldives annually, destined for 19 airports in 13 countries. Domestically, 12,000 flights make more than 450,000 seats available to passengers annually destined to 5 airports. Among the many reasons that people and businesses use air transport, people rely on it for holidays and visiting friends and family; while businesses use air transport for meeting clients and for the speedy and reliable delivery of mail and goods often over great distances. The air transport network, the Real World Wide Web, offers practical, fast and reliable transport across the globe. The regions which travellers fly to and from underline its global reach (see Chart 3.2). Airlines need ground-based infrastructure to operate. This infrastructure includes the facilities at Malé Airport, also called Ibrahim Nasir International Airport (MLE) and a second airport in the south called Gan International Airport (GAN). Both of these airports directly serve passengers, such as baggage handling, ticketing, retail and catering outlets. Less visible are the essential services which are sometimes provided off-site, such as air navigation and air regulation. In total approximately 2.6 million passengers and 32,000 tonnes of freight is handled annually at Male International Airport. Chart 3.4: Regional distribution of scheduled passenger trips originating in the Maldives Asia and Pacific Region, 46% North America, 0.1% Central and South America, 0.3% Domestic, 15% Chart 3.5: Maldivian jobs and output supported by the aviation sector 13 Headcount ' Direct Indirect Induced MVR billion Africa and Middle East, 1% Europe, 38% Source : IATA Source : IATA, Oxford Economics The Aviation sector in the Maldives (comprising the airlines as well as the airport and ground-based infrastructure) directly employs 2,100 people, and support through their supply chains a further 1,500 jobs. Examples of these supply-chain jobs include those in the distribution sector delivering aviation fuel; jobs in the catering sector and construction workers building or maintaining facilities at airports. A further 2,800 jobs are supported through the household spending of those employed by the sector and its supply chain. The Aviation sector directly contributes around MVR 737 million to the Maldivian economy (GDP). The sector contributes indirectly another MVR 189 million through the output it supports down its supply chain. 0 Jobs GDP 0 13 Totals may not sum due to rounding 17

18 A further MVR 360 million comes from the spending of the employees or those firms in the sector and its supply chains. Overall, the Aviation sector contributes MVR 1.3 billion to the economy (7.6% of GDP) and supports around 6,300 jobs in the Maldives. 3.4 Seychelles Airlines registered in Seychelles carry 242,000 passengers and 6,000 tonnes of freight a year to and from Seychelles. More than 1,600 scheduled international flights depart the Seychelles annually, destined for 12 airports in 10 countries. Domestically, more than 9,800 flights make over 250,000 seats available to passengers annually, destined to 2 airports. Among the many reasons that people and businesses use air transport, people rely on it for holidays and visiting friends and family; while businesses use air transport for meeting clients and for the speedy and reliable delivery of mail and goods often over great distances. The air transport network, the Real World Wide Web, offers practical, fast and reliable transport across the globe. The regions which travellers fly to and from underline its global reach (see Chart 3.2). Airlines need ground-based infrastructure to operate. This infrastructure includes the facilities at Victoria Airport, Seychelles only international airport, that directly serve passengers, such as baggage handling, ticketing, retail and catering outlets. Less visible are the essential services which are sometimes provided off-site, such as air navigation and air regulation. In total approximately 524 thousand passengers and 8,000 tonnes of freight is handled annually at Victoria International Airport. Chart 3.6: Regional distribution of scheduled passenger trips originating in the Seychelles Asia and Pacific Region, 12% North America, 0.5% Central and South America, 0.2% Chart 3.7: Jobs and output supported by the aviation sector in the Seychelles 14 Headcount ' Direct Indirect Induced SCR billion Africa and Middle East, 19% Domestic, 29% Europe, 40% 0.0 Jobs GDP 0 Source : IATA Source : IATA, Oxford Economics The Aviation sector in Seychelles (comprising the airlines as well as the airport and ground-based infrastructure) directly employs 1,200 people, and support through their supply chains a further 200 jobs. Examples of these supply-chain jobs include those in the distribution sector delivering aviation fuel; jobs in 14 Totals may not sum due to rounding. 18

19 the catering sector and construction workers building or maintaining facilities at airports. A further 400 jobs are supported through the household spending of those employed by the sector and its supply chain. The Aviation sector directly contributes around SCR 225 million to the Seychelles economy (GDP). The sector contributes indirectly another SCR 55 million through the output it supports down its supply chain. A further SCR 110 million comes from the spending of the employees or those firms in the sector and its supply chains. Overall, the Aviation sector contributes SCR 390 million to the economy (3.6% of GDP) and supports around 1,900 jobs in the Seychelles. 3.5 Tax contribution Aviation makes a substantial contribution to the public finances. In this section we estimate the corporation tax paid by aviation companies, the income tax paid by their employees, social security payments (both employer and employee contributions), and the revenue collected through aviation taxes. These estimates reflect the direct tax payments of the aviation sector. We also provide an indication of the taxes paid by the aviation sector s supply chain and taxes raised through induced spending channels. They do not include increases in the overall tax base of the Indian Ocean Islands economies driven by aviation s contribution to investment and productivity growth in the wider economy. Table 3.2: Aviation makes a substantial contribution to tax in the Indian Ocean Islands region 15 USD million USD million Taxes on Aviation Sector's GVA 24 Comprised of: Corporation Tax 9 Income Tax & Social Security payments 15 Passenger departure and value added tax 5 Aviation sector's direct tax contribution 29 Tax generated through the aviation sector's indirect & induced impact 34 Total tax attributable to the aviation sector's economic footprint 63 Source: Oxford Economics, IATA The aviation sector contributed $24 million in taxes through corporation tax and the income and social security contributions (both employee and employer contributions). This contribution is likely to increase further, as the sector recovers following a number of difficult years where many firms suffered losses. Air passengers paid a further $5 million in passenger departure taxes in Mauritius and value added taxes in the Seychelles, bringing the total tax contribution to nearly $29 million. Very indicatively, it is estimated that a further $34 million of government revenue is raised via taxation through the indirect ($11 million) and induced ($23 million) channels. As discussed in section 2.2, tourism forms an integral part of the economies of the Indian Ocean Islands. In addition to its contribution to GDP and employment, the sector is a vital source of public finances. Based on an economy wide average tax level, it is estimated that the tourism sector contributes $ Indirect and Induced Tax contribution is approximated by applying an economy wide average tax figure (as a proportion of GDP) to the Indirect and Induced GVA estimates, using data from the Oxford Economics Global Macroeconomic Model. 19

20 million in taxation through direct channels, $190 million through its indirect channels and a further $100 million through the induced expenditure of those employed directly and indirectly by the sector. 3.6 Investment and productivity Apart from these transformative effects on the wider economy, air transport services the airlines, airports and ancillary services, such as air traffic control form a capital intensive sector that invests heavily in aircraft systems and other advanced technology. Table 3.3: Investment by the aviation sector Investment as % value of output Air transport services 20.2 Indian Ocean Economy 29.1 Table 3.4: Labour productivity in the aviation sector Productivity (GVA per employee) Air transport services $21,682 Indian Ocean Economy $14,473 Source: IATA, Oxford Economics Source: IATA, Oxford Economics Table 3.3 reports the investment intensity of the aviation sector, as measured by its investment as a proportion of GVA. Investment in air transport services in the Indian Ocean Islands is equal to 20.2%. Table 3.4 provides an indication of the productivity of the aviation sector versus the rest of the economy. Measured as GVA per employee in USD, the combined productivity of air transport services in Indian Ocean Islands (the airlines and the ground-based infrastructure excluding retail and catering services at airports and tourism) is estimated to be $21,682. This is nearly 50% higher than that for the average productivity for the region as a whole ($14,473). This high level of productivity implies that were the resources currently employed in the aviation sector redeployed elsewhere in the economy, then this would be accompanied by a fall in overall output and income. For example, if productivity in the aviation sector was the same as the average productivity for the economy as a whole, then the level of GDP in the Indian Ocean Islands would be around 0.2% lower than it is (about USD 19 million in current prices). 20

21 4 Conclusion This study has described and quantified a number of channels through which aviation in the Indian Ocean Islands region generates important economic benefits for its customers and the wider economy. Studies of this kind usually focus on the economic footprint of the industry, the GDP and jobs supported by the industry and its supply chain. We provide the latest estimates for these metrics. But the economic value created by the industry is more than that. It is not just jobs that are threatened if government policies are badly designed. The welfare of voting citizens and the effectiveness of infrastructure critical to the country s long-term success are also at risk. The welfare of travelling citizens has been conservatively quantified in this study. Not all customers of airlines serving the Indian Ocean Islands airports are residents, but an estimated 31% are. They currently get an economic benefit estimated to be worth $489 million. Indicatively, 33% of the shippers using air freight services are domestic companies. Taxing air transport directly reduces the welfare of these residents and businesses. The study has also shown what a critical asset the air transport network is in the Indian Ocean Islands, to business and the wider economy. Connectivity between cities and markets boosts productivity and provides a key infrastructure on which modern globalized businesses depend. Many of these city-pair connections are dependent on hub airports through which to generate the traffic density necessary to sustain them. All airlines supplying services at The Indian Ocean Islands airports contribute to generating these wider economic benefits, primarily through boosting the tourism sector. These supply-side benefits are hard to measure but are easily illustrated by the experience of the volcanic ash cloud, which closed much of European airspace for a week in early Travellers were stranded. Globalized supply chains and just-in-time manufacturing processes came to a halt. More readily measured is the economic footprint supported, mostly, by the activities of national airlines. Domestic-based airlines were responsible for carrying approximately 45% of both passengers and freight. The wages, profits and tax revenues created by these airlines flows through the domestic economy, generating multiplier effects on national income or GDP. The economic benefits for the Indian Ocean Islands region created by non-domestic airlines are to be found in customer welfare and in the part these airlines play in providing the connectivity infrastructure between the Indian Ocean Islands and overseas cities and markets. Aviation has a significant footprint in the economies of the India Ocean Islands region, supporting 3.1% of GDP and 22,000 jobs or 2.9% of the regional workforce. Including the sector s contribution to the tourism industry, these figures rise to 27.2% of GDP and 187,000 jobs or 24.6% of the workforce. Also significant is the fact that these are high productivity jobs. The annual value added (or GVA) by each employee in air transport services in the Indian Ocean Islands region is $21,682, nearly 50% higher than the average of $14,473. Tax revenues from aviation are substantial. Domestic-based aviation companies paid $24 million annually in direct taxes and social security payments, while passengers paid $5 million in air passenger departure and value added taxes. It is estimated that an additional $11 million of government revenue is raised via the aviation sector s supply chain and $23 million through taxation of the activities supported by the spending of employees of both the aviation sector and its supply chain. All together these points demonstrate that aviation provides significant economic benefits to the economies of the Indian Ocean Islands and its citizens, some of which are unique and essential to the operation of modern economies. 21

22 Annex: Our methods Benefits to passengers and shippers In Section 1, we report estimates for the monetary benefits that air transport customers receive through the services provided by the aviation sector. These estimates are based on the economic concept of consumer surplus, the difference between the passengers or shippers willingness-to-pay and the actual airfare or freight rate they face. In order to calculate the overall consumer surplus for the various fare types and for freight, we need three pieces of information: (1) data on passenger numbers, freight tonnage and their respective average fares and freight charge; (2) an estimate of how sensitive passenger numbers and freight tonnage are to changes in fares and freight, known as the elasticity of demand; and (3) an assumption about customers willingness to pay (airfare and freight charges), reflected through an assumption about the shape of the market demand curve. The calculations are based on 2009 data on total passenger numbers and freight tonnage arriving and departing from domestic airports, together with the average fare and freight charge, broken down by the following market segments: first class, business class, economy, economy discount, and freight. The data are provided by IATA. We apply an estimate for the elasticity of demand for each market segment. These indicate the percentage change in demand that would follow a one percent change in the average fare, or freight charge. We draw on the findings of several recent studies that investigate elasticities of demand for air transport, to choose elasticities for each market segment that we believe are reasonable 16. The passenger elasticities vary across islands depending on the regional distribution of air passengers for each island: they average for first class and business, and -0.6 for economy. The freight elasticity is Based on these inputs, we calculate consumer surplus based on the approach proposed by Brons, Pels, Nijkamp, and Rietveld (2002) that assumes that the demand curve for each market segment has a constant elasticity of demand 17. Connectivity Index The connectivity index is a measure of the quality of a country s air transport network that reflects both the volume of passenger traffic and the importance of the destinations served. For every destination country for which there are direct services, an estimate of total passenger seat capacity is derived from data on the frequencies of service and the available seats per flight. From this underlying data, an index is constructed by attaching a weight to each destination. This weight reflects the relative importance of the destination in the global air transport network, measured by the number of seats available for passengers from that airport relative to Atlanta, the largest airport. The connectivity index will therefore have a higher value, the more destinations are served, the higher the frequency of services, the larger the number of available seats per flight and the greater the relative importance of the destinations served. Benefits to tourism In quantifying the benefits from Travel & Tourism (T&T) we were seeking to capture the spending by tourists and businesses on accommodation, food etc outside of their airfare (which forms part of our estimate of the 16 Estimating Air Travel Demand Elasticities, by InterVISTAS Consulting Inc (2007). Available at 17 See 22

23 direct calculation). In doing this we relied heavily on the Oxford Economics Travel & Tourism model prepared on behalf of the World Travel & Tourism Council (WTTC) which simulates Tourism Satellite Account (TSA) data across over 180 countries. From the model we obtained an estimate of the level of value-added created by foreign visitors, and assigned a share of this to the aviation industry based on the share of foreign visitor arrivals travelling by air. We then used coefficients within the model to divide this between T&T providers (direct) and their supply chain (indirect). Finally, we attributed a share of the total induced effect to the aviation industry by dividing our estimates of aviation-related direct and indirect GDP by total T&T direct and indirect GDP. It should be noted that this is a gross measure of the benefit from tourism and therefore does not account for the spending which is effectively lost when domestic residents travel abroad by air. Economic footprint In Section 3 we report the contribution that the aviation sector makes to the economy. The contribution is measured in terms of the value of the sector s output and the number of people it employs. For each measure, the contribution is built up from three components: direct, indirect, and induced. The direct output component is measured by Gross Value Added (GVA). GVA is measured either as the firm or industry sales revenue less purchases from other companies, or equivalently, as the sum of employee compensation and gross operating surplus, measured before the deduction of depreciation, interest charges and taxation. In this report we treat gross operating surplus as equivalent to gross operating profit, however, the two concepts differ slightly with the former including income from land and a technical adjustment for the change in stock valuation. GVA differs from Gross Domestic Product (GDP) in the price used to value goods and services. GVA is measured at producer prices that reflect the price at the factory gate together with cost of distribution. GDP is measured at market prices that reflect the price paid by the consumer. The two prices differ by the taxes less subsidies levied on the goods or services. The indirect output component is measured using an Input-Output table that reports how industries use the output of other industries in the process of production, and how their final output is used, e.g. in final domestic consumption, changes in stocks or exports. For many countries, Input-Output tables are available as part of the national accounts. As Input-Output tables describe how an industry uses the output of other industries as inputs in the production of its goods or service, they describe its full supply chain its direct suppliers, those industries that supply its direct suppliers, and so on. This is reported as the indirect output component. The Input-Output table reports how much of final output is sold in the domestic economy. Using similar methods as that used to derive the indirect output component, the Input-Output table can be used to estimate how much spending on completed goods (known as final domestic consumption) is supported through the employees of the industry and its full supply chain. This is reported as the induced output component. Based on analysis at Oxford Economics, the ratio of induced output to the sum of direct and indirect output is capped at 30%. The three output components direct, indirect, and induced are converted to their respective employment components, using an estimate for the average labour productivity (GVA per employee) for the economy. Exchange rates For the purposes of presenting consolidated figures in USD, the following 2009 annual average exchange rates have been applied where appropriate: MUR-USD: MVR-USD: SCR-USD:

24 Passenger and freight volumes Passenger and freight traffic is accounted for in different ways across the industry supply chain, depending on the focus of the operator and the purpose of analysis. For example, airlines generally count the number of passengers who board their aircraft, whereas airports often count the number of passengers arriving or departing their airport which in some cases can lead to totals significantly larger than those reported by airlines, despite referring to the same inherent volume of passengers. The table below outlines the main passenger and freight volumes referred to in this report. In particular, it shows how the numbers used in the calculation of consumer benefit and the economic footprint were derived. Mauritius Passenger numbers 2009 Millions Millions Number of passengers arriving or departing Mauritian airports (A) 2.4 Less domestic arrivals at Mauritian airports (due double counting) -0.1 Number of passengers on aircraft flying to, from or within Mauritius (B) Freight tonnes 2009 Thousands Thousands Tonnes of freight carried on aircraft flying to, from or within Mauritius (E) Carried by Mauritian airlines (C) 0.44 Mauritian residents (D) 27 Carried by Mauritian airlines (F) 10 Carried by non-mauritian airlines Passenger measure Millions Use in report Source A Number of passengers arriving or departing Mauritian airports 2.4 Overall indicator of passenger arrivals and departures handled by airports in Mauritius. Airports of Mauritius Co Ltd B C D E F Number of passengers on aircraft flying to, from or within Mauritius Passengers carried by Mauritian registered airlines Number of Mauritian residents on flights flying to, from or within Mauritius Freight measure Tonnes of freight carried on aircraft flying to, from or within Mauritius Tonnes of freight uplifted by Mauritian registered airlines Overall indicator of airline passenger traffic associated with the Mauritian market. Overall indicator of passenger output performed by airlines in the scope of the economic footprint analysis in Section 3 of this report Basis for calculation of passenger consumer surplus accruing to Mauritian economy. Airports of Mauritius Co Ltd Air Mauritius Estimate based on 19% of 2.3 million passengers (B) Thousands Use in report Source Overall indicator of freight loaded and unloaded at airports in Mauritius. Overall indicator of freight output performed by airlines in the scope of the economic footprint analysis in Section 3 of this report The Mauritius Chamber of Commerce and Industry Air Mauritius 24

25 Maldives Passenger numbers 2009 Millions Millions Number of passengers arriving or departing Maldivian airports (A) 2.6 Less domestic arrivals at Maldivian airports (due double counting) -0.4 Number of passengers on aircraft flying to, from or within Maldives (B) Freight tonnes 2009 Thousands Thousands Tonnes of freight carried on aircraft flying to, from or within Maldives (E) Carried by Maldivian airlines (C) 1.0 Maldivian residents (D) 0.5 Carried by Maldivian airlines (F) 31.5 Carried by non-maldivian airlines Passenger measure Thousands Use in report Source A Number of passengers arriving or departing Maldivian airports 2.59 Overall indicator of passenger arrivals and departures handled by airports in Maldives. Derived from 2 million passenger figure (B), but doubles the count of domestic passengers to account for both their arrival and departure at a Maldivian airport. B Number of passengers on aircraft flying to, from or within Maldives 2.17 Overall indicator of airline passenger traffic associated with the Maldivian market. Maldivian Government Statistics C D E F Passengers carried by Maldivian registered airlines Number of Maldivian residents on flights flying to, from or within Maldives Freight measure Tonnes of freight carried on aircraft flying to, from or within Maldives Tonnes of freight uplifted by Maldivian registered airlines Overall indicator of passenger output performed by airlines in the scope of the economic footprint analysis in Section 3 of this report Basis for calculation of passenger consumer surplus accruing to Maldivian economy. Maldivian Government Statistics Estimate based on 50% of 2 million passengers (B) Thousands Use in report Source Overall indicator of freight loaded, unloaded and transit at airports in Maldives. Overall indicator of freight output performed by airlines in the scope of the economic footprint analysis in Section 3 of this report Maldivian Government Statistics Maldivian Government Statistics 25

26 Seychelles Passenger numbers 2009 Thousands Thousands Number of passengers arriving or departing Seychelles airports (A) 609 Less domestic arrivals at Seychelles airports (due double counting) -85 Number of passengers on aircraft flying to, from or within Seychelles (B) Freight tonnes 2009 Thousands Thousands Tonnes of freight carried on aircraft flying to, from or within Seychelles (E) Carried by Seychelles airlines (C) 97 Seychelles residents (D) 6 Carried by Seychelles airlines (F) 2 Carried by non-seychelles airlines Passenger measure Thousands Use in report Source A Number of passengers arriving or departing Seychelles airports 609 Overall indicator of passenger arrivals and departures handled by airports in Seychelles. Seychelles Civil Aviation Authority B C D E F Number of passengers on aircraft flying to, from or within Seychelles Passengers carried by Seychelles registered airlines Number of Seychelles residents on flights flying to, from or within Seychelles Freight measure Tonnes of freight carried on aircraft flying to, from or within Seychelles Tonnes of freight uplifted by Seychelles registered airlines Overall indicator of airline passenger traffic associated with the Seychelles market. Overall indicator of passenger output performed by airlines in the scope of the economic footprint analysis in Section 3 of this report Basis for calculation of passenger consumer surplus accruing to Seychelles economy. Seychelles Civil Aviation Authority Seychelles Civil Aviation Authority Seychelles Civil Aviation Authority Thousands Use in report Source 8 6 Overall indicator of freight loaded and unloaded at airports in Seychelles. Overall indicator of freight output performed by airlines in the scope of the economic footprint analysis in Section 3 of this report Seychelles Civil Aviation Authority Seychelles Civil Aviation Authority 26

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